Bretton Woods-the Factors in Its Collapse and the Implications for International Political Economy
By the 1970s the unsustainability of the Bretton Woods System (BWS) became increasingly apparent. Evaluate the factors which led to the collapse of the BWS and its impact on the subsequent evolution of the international political economy
Following the Second World War, the Bretton Woods system was implemented as a means of monetary management among independent nation states. It was based on Keynesian economics and a shared belief in capitalism. Bretton Woods, BWS, was considered a necessary response to the anarchic protectionist and neomerchantilist policies favoured in the great depression of the 30s. It was used to stop nation states using currency devaluations to increase competitiveness. Due to a lack of scale and coordination, these policies stagnated foreign direct investment and international trade volume. Bretton Woods created a fixed exchange rate system pegged to the dollar, maintained by other countries selling or buying their own currency and in turn keeping its value linked to that of the dollar. For more than a decade the system was associated with steady growth and trade. However, by the late 60s,as a result of a power shift away from the hegemony of the USA, as well as the misuse of both fiscal and monetary policy and the outflow of capital 'the system was on a trajectory headed towards collapse.'1 A prominent factor in the system’s decline was the USA's existence as a dominant hegemony. Following the Second World War many countries were left with depleted capabilities. Not only in terms of military force, but also politically weakened and economically exhausted, which left the USA as a prominent power with control over half of the world’s manufacturing capacity, and half the world’s gold. This gave it the ability to pressure previously dominant countries, such as the UK and France, into accepting the Bretton Woods system, especially since these countries realised they could not effectively compete with the USA in an open market. While the
Following the Second World War, the Bretton Woods system was implemented as a means of monetary management among independent nation states. It was based on Keynesian economics and a shared belief in capitalism. Bretton Woods, BWS, was considered a necessary response to the anarchic protectionist and neomerchantilist policies favoured in the great depression of the 30s. It was used to stop nation states using currency devaluations to increase competitiveness. Due to a lack of scale and coordination, these policies stagnated foreign direct investment and international trade volume. Bretton Woods created a fixed exchange rate system pegged to the dollar, maintained by other countries selling or buying their own currency and in turn keeping its value linked to that of the dollar. For more than a decade the system was associated with steady growth and trade. However, by the late 60s,as a result of a power shift away from the hegemony of the USA, as well as the misuse of both fiscal and monetary policy and the outflow of capital 'the system was on a trajectory headed towards collapse.'1 A prominent factor in the system’s decline was the USA's existence as a dominant hegemony. Following the Second World War many countries were left with depleted capabilities. Not only in terms of military force, but also politically weakened and economically exhausted, which left the USA as a prominent power with control over half of the world’s manufacturing capacity, and half the world’s gold. This gave it the ability to pressure previously dominant countries, such as the UK and France, into accepting the Bretton Woods system, especially since these countries realised they could not effectively compete with the USA in an open market. While the